Integrated Finance Company v. Reserve Bank of India Chennai
2014-02-13
V.RAMASUBRAMANIAN
body2014
DigiLaw.ai
Judgment : 1. The petitioner challenges in this writ petition, an order passed by the respondent, rejecting the request of the petitioner for using the interest accumulated on the SLR amount, for making payment to the secured creditors under a One Time Settlement Proposal. 2. I have heard Mr.Arvind P.Datar, learned Senior Counsel for the petitioner and Mr.T.Poornam, learned counsel for the respondent. 3. The petitioner was established as a Non-Banking Finance Company incorporated under the Companies Act, 1956. When the petitioner-company, got into a financial crisis, the respondent issued a communication dated 18.1.2005 prohibiting the petitioner from accepting any further deposits from the public and also prohibiting the petitioner from selling, transferring, creating a charge or mortgaging the assets of the company, without the written permission of the respondent. The said order was passed in terms of Section 45-MB (2) of the Reserve Bank of India Act, 1934. 4. By a further communication dated 28.6.2005, the respondent permitted the petitioner to dispose of the Statutory Liquidity Ratio Investments, in excess of the requirement computed on the level of deposits, as at the end of the second preceding month. The permission so granted was subject to various conditions including the condition that the sale proceeds will be kept in an Escrow Account with a Scheduled Commercial Bank and that those funds will be utilised only for payment of matured deposits. The company should also speed up the process of realisation of dues to repay the deposits and to submit a monthly return of realisation of assets. 5. Thereafter, the petitioner approached this Court by way of a petition in C.P.No.160 of 2005 under Section 391 of the Companies Act, 1956, proposing a Scheme of Compromise with the deposit and bond holders. The Scheme was approved by the Company Court by an order dated 19.8.2006. But the said order was reversed by the Division Bench by an order dated 30.4.2008 in O.S.A.No.308 of 2006. The petitioner filed Special Leave Petitions in SLP (Civil) Nos.12737 to 12740 of 2008. But the Special Leave Petitions were dismissed by the Supreme Court by an order dated 16.7.2013. 6.
But the said order was reversed by the Division Bench by an order dated 30.4.2008 in O.S.A.No.308 of 2006. The petitioner filed Special Leave Petitions in SLP (Civil) Nos.12737 to 12740 of 2008. But the Special Leave Petitions were dismissed by the Supreme Court by an order dated 16.7.2013. 6. In the meantime, after the order of the Division Bench of this Court, rejecting the Scheme of Compromise proposed by the petitioner, the petitioner approached the respondent on 19.6.2008, seeking permission to sell the SLR securities as well as some assets, so that the secured creditors, with whom the petitioner had entered into One Time Settlement Proposals, could be paid off. 7. But the said request was rejected by the respondent by an order dated 17.2.2009. The petitioner, however, renewed their request on 9.3.2009 and 5.1.2010, both of which were again rejected on 26.4.2010. 8. In the meantime, under a Government Order G.O.Ms.No.152, dated 8.3.2013, the Bank Accounts of the petitioner company as well as its immovable properties were attached in terms of the provisions of the Tamil Nadu Protection of Interests of Depositors Act, 1997. Challenging the said order, the petitioner filed a writ petition in W.P.No.13030 of 2013. The writ petition was admitted and an interim stay was granted. 9. In the meantime, some of the creditor banks of the petitioner assigned their debts to the Asset Reconstruction Company of India Limited (ARCIL). The Banks that assigned their debt in favour of ARCIL were the United Bank of India, the State Bank of Patiala, the Indian Overseas Bank, the State Bank of Saurashtra and Catholic Syrian Bank. 10. ARCIL accepted a One Time Settlement Proposal from the petitioner, by a letter dated 4.3.2013. Under the said proposal, ARCIL was prepared to accept an amount of Rs.1,28,02,000/-, in discharge of the liabilities due to those 5 Banks to the tune of Rs.43.55 crores. The acceptance of the OTS was subject to two conditions, namely, (i) that the petitioner should make upfront payment of 25% and (ii) should pay the balance amount, on or before 15.4.2013. 11. Therefore, the petitioner made a request again to the respondent on 30.3.2013, highlighting the advantages of the OTS proposals.
The acceptance of the OTS was subject to two conditions, namely, (i) that the petitioner should make upfront payment of 25% and (ii) should pay the balance amount, on or before 15.4.2013. 11. Therefore, the petitioner made a request again to the respondent on 30.3.2013, highlighting the advantages of the OTS proposals. Since there was no response and also since time was running out, the petitioner filed W.P.No.13185 of 2013 on the file of this Court, seeking a direction to the respondent to permit them to use the money lying in SLR security with the Federal Bank. After notice was served in the said writ petition, the respondent passed an order dated 8.5.2013, rejecting the request for liquidating one SLR security. In view of the order of rejection, the Writ of Mandamus in W.P.No.13185 of 2013 became infructuous. Therefore, the petitioner withdrew the said writ petition and came up with the above writ petition, challenging the order of the respondent dated 8.5.2013. 12. The request of the writ petitioner for availing one SLR security for payment of dues to 5 secured creditor Banks under the OTS, has been rejected by the impugned order for the following reasons:- (i) that under Section 45-IB of the Reserve Bank of India Act, 1934, every Non-Banking Financial Company is obliged to invest and continue to invest in unencumbered approved securities, an amount not less than 5% or such higher percentage not exceeding 25% as prescribed on the deposits outstanding at the close of business on the last working day of the second preceding quarter; (ii) that in terms of para (1)(iii) of notification dated 31.1.1998, issued by Reserve Bank of India, every Non-Banking Financial Company should invest in unencumbered approved securities, an amount not less than 15% of the public deposits outstanding at the close of business on the last working day of the second preceding quarter; (iii) that as on 31.3.2011, public deposits amounting to Rs.34.21 crores were still outstanding in the books of the petitioner-company; (iv) that the SLR securities held by the petitioner-company, amounted to Rs.6.72 crores; and (v) that since the petitioner-company is unable to pay its depositors, the amounts held in SLR securities and the interest accrued thereon, which works out to less than the company's liability to the depositors, cannot be allowed to be liquidated. 13. The respondent has also filed a counter to the same effect.
13. The respondent has also filed a counter to the same effect. In short, the stand taken by the respondent is that the amounts lying in SLR securities and the interest accrued thereon, are intended to be securities for the due repayment of the amounts due to the depositors and that those securities cannot be liquidated with a view to discharge even the obligations to the secured creditor Banks. 14. Before proceeding to consider the rival submissions, certain developments that had taken place in the past two years in respect of the petitioner-company, also deserve to be noted. They are:- (i) A petition for winding up the petitioner-company, was filed in C.P.No.172 of 2013 by one of the creditors, namely, Federal Bank Limited under Section 433 of the Companies Act. In Company Application Nos.804, 826 and 827 of 2013 in the said company petition, a retired Officer of the Indian Administrative Service, who is now practising as an Advocate, was appointed as an Administrator, for the purpose of recovering all amounts due to the petitioner from its own debtors and for discharging the obligations to the creditors, workmen as well as depositors. (ii) The above writ petition was also directed to be tagged along with the company petition, so that the Company Court is seized of all the matters. This is how the above writ petition came before me. Therefore, a holistic view for resolving the problems of the depositors, the secured and unsecured creditors and the workmen, is what I am now obliged to take. Keeping this in mind, let me see whether the rejection of the request of the petitioner by the respondent was legally valid and factually justified or not. 15. Since factual justification for the prayer of the petitioner, in my opinion, is more important than the legal basis on which they have come up with the above writ petition and also since the petitioner has a primary responsibility to satisfy me about the genuineness of the proposal, I shall first take up for consideration the factual details. 16. The only reason as to why the petitioner wants to liquidate and take the SLR investments, is to avail the benefit of One Time Settlement Proposals granted by the Consortium of Banks, some of whom have now assigned the debts to the Asset Reconstruction Company.
16. The only reason as to why the petitioner wants to liquidate and take the SLR investments, is to avail the benefit of One Time Settlement Proposals granted by the Consortium of Banks, some of whom have now assigned the debts to the Asset Reconstruction Company. In the affidavit in support of the writ petition, the petitioner has stated that 5 Banks viz., United Bank of India, State Bank of Patiala, Indian Overseas Bank, State Bank of Saurashtra and Catholic Syrian Bank have assigned the debts in favour of ARCIL and that the amounts repayable to those 5 Banks as on March 2013 was about Rs.43.55 crores and that ARCIL has agreed to take under the One Time Settlement Proposal, a sum of Rs.1,28,02,000/-. Though this fact is not denied by the respondent, the respondent has stated in paragraph 10 of the additional counter affidavit that there are several other Banks who are also secured creditors and that a OTS proposal for some of the Banks in preference to the others will neither resolve the problems nor permissible in law. In paragraphs 10 to 13 of the additional counter affidavit, the respondent has stated that the petitioner enjoyed credit facilities from 12 Banks to the total tune of Rs.68.87 crores and that the total borrowings as on 31.3.2011, inclusive of accrued interest, was Rs.108.16 crores. The respondent has further stated that the discharge of liabilities taken over by ARCIL, would leave 7 Banks who have not assigned their debts in the lurch. 17. In a tabular column, the respondent has furnished in paragraph 10 of their additional counter affidavit, the following information:- Sl.No. Particulars Amount (Rs. in crore) Security 1 Public deposits including interest accrued thereon 34.21 Unsecured 2 Secured Redeemable Debentures/Bonds including interest (subscribed mainly be individuals) 102.91 Investments in unquoted equity shares, stock on hire not hypothecated / pledged to banks, receivables on loans and advances. 3 Borrowings from Banks including interest 108.16 Stock on hire, receivables on loans and advances 4 Inter-corporate deposits/loans 2.23 Total 247.51 18. In response to the above information furnished by the respondent in their additional counter affidavit, Mr.Arvind P.Datar, learned Senior Counsel appearing for the petitioner produced a statement.
3 Borrowings from Banks including interest 108.16 Stock on hire, receivables on loans and advances 4 Inter-corporate deposits/loans 2.23 Total 247.51 18. In response to the above information furnished by the respondent in their additional counter affidavit, Mr.Arvind P.Datar, learned Senior Counsel appearing for the petitioner produced a statement. In the said statement, he has given two tables, one comprising of the amounts outstanding to a Consortium of 5 Banks who have assigned their debts to ARCIL and the second table comprising of the amounts outstanding to the second Consortium of 5 Banks. It will be useful to extract both tables to understand the factual justification with which the petitioner has come up, for the grant of the above relief. Therefore, both tables are extracted as follows:- Secured Creditors-Banks Sl.No Bank Dues as per Consortium Shares (Rs.) Dues as per DRT (Rs.) Book Value (Rs.) OTS (Rs.) ARCIL 1. State Bank of Patiala 2.40 crores 3,21,48,938.09 5,41,34,157.73 16.10Lakhs 2. State Bank of Saurashtra 4.68 crores 19,00,68,575.48 10,21,80,523.03 31.40 Lakhs 3. Indian Overseas Bank 4 crores 4,46,75,071.48 9,99,93,291.17 26.84 Lakhs 4. United Bank of India 5 crores 10,84,91,903.65 13,78,06,563.58 33.55 Lakhs 5. Catholic Syrian Bank 3 crores - 6,52,82,075.04 20.13Lakhs Sub Total 19.08 crores 37,53,84,488.32 45,93,96,610.55 1.2802 crores SBT Consortium 6. State Bank of Travancore (informally accepted - formal letter awaited) 19.92 crores 79,35,00,261.85 44,72,18,348.92 1.33 Crores 7. State Bank of Mysore (OTS accepted vide letter dated 5.2.2014) 4.30 crores 18,82,62,671.07 9,91,97,525.23 28.85Lakhs 8. Karur Vysya Bank 80 lakhs 5,52,43,661.33 2,21,03,144.45 5.36Lakhs 9. Federal Bank 5 crores 27,05,20,343.47 12,66,53,478.09 66.80Lakhs 10. State Bank of Bikaner & Jaipur 3 crores 13,28,44,237.63 8,13,43,955.81 20.13Lakhs Sub Total 33.02 144,03,71,175.35 77,65,16,452.50 3.0238 Crores Total 52.1 crores 200,19,38,004.67 128,59,13,063.05 4.304 crores 19. Having considered the contentions raised by the respondent in paragraphs 10 to 13 of their additional counter affidavit and the information furnished by the petitioner in the form of two tabular statements extracted as above, I am of the view that the petitioner has enough justification, at least on facts, for seeking payment of at least the interest accumulated on the SLR reserves. My conviction is further fortified by the offer made by the learned Senior Counsel for the petitioner that the respondent need not even pay any amount to the petitioner or to the Administrator appointed by this Court.
My conviction is further fortified by the offer made by the learned Senior Counsel for the petitioner that the respondent need not even pay any amount to the petitioner or to the Administrator appointed by this Court. The learned Senior Counsel for the petitioner states that the petitioner is prepared to pass on to the respondent, the letters of acceptance of the OTS proposal from the respective Banks and that the petitioner will be satisfied even if the respondent makes payment directly to those Banks, towards the implementation of the OTS Schemes. 20. In view of the above, I am of the considered opinion that if all the secured creditor Banks issue letters of acceptance of OTS Proposals, the respondent cannot have any objection at least to release the amounts claimed by those creditor Banks, most of which are Nationalised Banks and some of them are Scheduled Banks, directly to them. The total amount required for payment to all the 10 Banks under both the Consortiums, works out to only Rs.4,30,40,000/-. Once this amount is paid, the debts to the total tune of about Rs.128,59,13,063/- will get wiped out. The respondent need not even have any suspicion about the motives of the petitioner, since the petitioner is willing to allow the respondent to make payments directly to those Banks. 21. The main objection of the respondent, as I have indicated above, is that the SLR amount is intended for the benefit of the depositors and that the same cannot be used to pay off the Banks. The legality of the said contention will be taken up by me in the next part of this order. But the factual justification can be seen from the fact that once secured creditor Banks to whom a total amount of Rs.128 crores is due, are paid off with just Rs.4.30 crores, the company's net-worth turns positive and all the assets get released. This will certainly enure to the benefit of the depositors. All assets will become free of encumbrances and they will become available for the depositors in entirety. This is the factual justification for the prayer of the petitioner. LEGAL BASIS: 22. Now let me come to the legal basis on which the petitioner seeks the above relief. 23. According to the statement furnished by the petitioner, the petitioner has a SLR account with the Federal Bank.
This is the factual justification for the prayer of the petitioner. LEGAL BASIS: 22. Now let me come to the legal basis on which the petitioner seeks the above relief. 23. According to the statement furnished by the petitioner, the petitioner has a SLR account with the Federal Bank. The amount lying there is Rs.7,95,00,000/- as on 31.10.2013. The interest that has accumulated there is Rs.2,25,25,565.27 as on the same date. The principal amount of money payable to all the depositors is Rs.25.88 crores, on which, interest to the tune of Rs.8.30 crores, has accumulated upto the date of maturity in the year 2005. Therefore, the total amount due to the depositors is Rs.34.18 crores. Since the petitioner is obliged to maintain 15% of the total amount of deposits, in SLR, the amount required to be maintained in SLR, according to the petitioner, is only Rs.3.88 crores. Therefore, the petitioner originally wanted the entire portion of the interest accumulated on SLR and one portion of the SLR, to be utilised for paying off all the 10 secured creditor Banks. 24. But, today, the petitioner is prepared to to confine the relief sought only to the extent of utilising the interest on SLR viz., Rs.2,25,25,565.27. The petitioner appears to have 8 fixed deposits in the State Bank of India on which interest has accumulated and the total amount available there is about Rs.112 lakhs. Therefore, the petitioner confined his prayer only to the release of the interest alone that has accumulated on the SLR, for discharging the liabilities to all the Banks under the OTS. 25. Therefore, the question that legally arises for consideration is whether the petitioner can be permitted to take the interest accumulated on the SLR, for the purpose of discharging their liabilities to creditors other than the depositors. 26. To find an answer to the above question, we must find out primarily as to (i) whether the interest accumulated on SLR is actually part of SLR and (ii) whether a Non-Banking Financial Corporation is obliged to maintain the level of SLR at the rate of 15% on the principal amount of deposits alone or on the principal and interest taken together on the deposits. 27. According to the respondent, every Non-Banking Financial Corporation is liable to maintain in SLR investments, a total amount equivalent to 15% of the deposits.
27. According to the respondent, every Non-Banking Financial Corporation is liable to maintain in SLR investments, a total amount equivalent to 15% of the deposits. The respondent claims that this 15% is to be calculated on the aggregate of the principal amount as well as the interest due to be paid to the depositors. As a corollary to this submission, the respondent claims that the interest accumulated on SLR becomes part of SLR, in view of the obligation of a Non-Banking Financial Company, to maintain SLR both on the principal and the interest accrued on the deposits. 28. Therefore, I would divide the discussion into two portions, the first dealing with the question whether the obligation on the part of Non-Banking Financial Companies (NBFCs) to maintain SLR at a particular percentage, is only on the principal amount of deposits or on the aggregate of the principal and interest and the second portion dealing with the question whether the interest accrued on SLR forms part of the SLR. QUESTION No.1: 29. As I have indicated earlier, every Non-Banking Financial Corporation is obliged under Section 45-IB to invest and continue to invest in India in unencumbered approved securities, valued at a price not exceeding the current market price of such securities, an amount which, at the close of business on any day, shall not be less than 5% or such higher percentage not exceeding 25% of the deposits outstanding on the last working day of the second preceding quarter. Similarly, in terms of paragraph (1)(iii) of Notification No.DFC/121/EO(G)-98 dated 31.1.1998, every Non-Banking Financial Company shall invest in any unencumbered approved securities, an amount not less than 15% of the public deposits of outstanding at the close of business on the last working day of the second preceding quarter. 30. Therefore, the first question is whether this 15% is to be calculated only on the principal amount of deposits received by the Non-Banking Financial Companies or on the principal amount taken together with the interest accrued thereon. If the requirement to maintain 15% as investments in SLR, is only on the principal amount of deposit, the investment once made will not get altered except with the receipt of every new deposit.
If the requirement to maintain 15% as investments in SLR, is only on the principal amount of deposit, the investment once made will not get altered except with the receipt of every new deposit. If on the contrary, the requirement of 15% to be maintained in investments is on both the principal and the interest accumulated on deposits, the amount to be maintained in SLR will keep varying from time to time. Keeping this in mind, let us now examine the provisions of the Reserve Bank of India Act, 1934 and the notifications issued thereunder. 31. The Reserve Bank of India Act, 1934 is actually a colonial legislation. After independence, the Reserve Bank of India Act, 1934 was amended by several enactments such as Act 32 of 1951, Act 54 of 1953, Act 19 of 1957, Act 14 of 1959, Act 14 of 1960, Act 35 of 1962, Act 55 of 1963, Act 44 of 1973, Act 51 of 1974, Act 24 of 1978, Act 81 of 1985, Act 8 of 1991, Act 9 of 1991, Act 23 of 1997 and Act 26 of 2006. Chapter III-A containing Sections 45-A to 45-G was incorporated under Act 35 of 1962, providing for collection and furnishing of credit information. Subsequently, Chapter III-B containing Sections 45-H to 45-QB was inserted by Act 55 of 1963 with effect from 1.12.1964. We are now concerned primarily with the provisions contained in Chapter III-B as they relate to Non-Banking Institutions receiving deposits. 32. Clause (bb) of Section 45-I of the Act defines the word "deposit" as follows: "[(bb) deposit includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form, but does not include, - (i) amounts raised by way of share capital; (ii) amounts contributed as capital by partners of a firm; (iii) amounts received from a scheduled bank or a co-operative bank or any other banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); (iv) any amount received from, - Item (a) omitted by Act 53 of 2003, S.12 and Sch. (w.e.f. 2.7.2004).
(w.e.f. 2.7.2004). Prior to its omission, Item (a) read as under:- (a) the Development Bank, (b) a State Financial Corporation, (c) any financial institution specified in or under section 6A of the Industrial Development Bank of India Act, 1964 (18 of 1964), or (d) any other institution that may be specified by the Bank in this behalf; (v) amounts received in the ordinary course of business, by way of - (a) security deposit, (b) dealership deposit, (c) earnest money, or (d) advance against orders for goods, properties or services; (vi) any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in any State; and (vii) any amount received by way of subscriptions in respect of a chit. Explanation I. – “Chit” has the meaning assigned to it in clause (b) of section 2 of the Chit Funds Act, 1982 (40 of 1982). Explanation II.- Any credit given by a seller to a buyer on the sale of any property (whether movable or immovable) shall not be deemed to be deposit for the purposes of this clause;]" The above definition was inserted only by Amendment Act 1 of 1984 with effect from 15.2.1984. 33. Section 45-IB contains various conditions relating to maintenance of percentage of assets by every Non-Banking Financial Company. Sub-section (1) of Section 45-IB is of relevance and hence it is extracted as follows:- "45-IB. Maintenance of percentage of assets.(1) Every non-banking financial company shall invest and continue to invest in India in unencumbered approved securities, valued at a price not exceeding the current market price of such securities, an amount which, at the close of business on any day, shall not be less than five per cent, or such higher percentage not exceeding twenty-five per cent, as the Bank may, from time to time and by notification in the Official Gazette, specify, of the deposits outstanding at the close of business on the last working day of the second preceding quarter: Provided that the Bank may specify different percentages of investment in respect of different classes of non-banking financial companies." 34.
Sub-sections (2) to (5) of Section 45-IB prescribes:- (i) that the Reserve Bank may require every Non-Banking Financial Company to furnish periodical returns for ensuring compliance with the provisions of sub-section (1); (ii) that whenever the amount invested by a Non-Banking Financial Company falls below the rate specified in sub-section (1), such company shall be liable to pay a penal interest at the rate of 3% per annum above the bank rate on the amount of shortfall; (iii) that such penal interest shall be paid within 14 days from the date on which a notice is served; (iv) that if payment of the penal interest is also not made, a Civil Court can impose a penalty; and (v) that the Reserve Bank is entitled not to demand payment of penal interest, if it is satisfied that the Non-Banking Financial Company had sufficient cause for not complying with the provisions of sub-section (1). 35. Sub-section (5) of Section 45-IB is very relevant and hence it is extracted as follows:- "(5) Notwithstanding anything contained in this section, if the Bank is satisfied that the defaulting non-banking financial company had sufficient cause for its failure to comply with the provisions of sub-section (1), it may not demand the payment of the penal interest." 36. Therefore, it is clear that a power is vested upon the Reserve Bank to condone the failure of a Non-Banking Financial Company to comply with the provisions of Sub-section (1). This is an indication that the respondent is conferred by the statute, a discretion, both in the matter of prescribing the percentage of investment (different percentages for different classes, as per the proviso to sub-section (1)) and in the matter of condoning the failure of an institution to comply with sub-section (1). 37. Section 45-MB of the Act, empowers the Reserve Bank (i) to prohibit a Non-Banking Financial Company from accepting any deposit and (ii) to prohibit them from selling, transferring, creating a charge or mortgaging or dealing in any manner, with its properties and assets, without the prior written permission of the Bank, for a period not exceeding six months. This Section 45-MB was inserted only by Amendment Act 23 of 1997 with effect from 9.1.1997. 38.
This Section 45-MB was inserted only by Amendment Act 23 of 1997 with effect from 9.1.1997. 38. Section 45-MC, also inserted by Amendment Act 23 of 1997, enables the Reserve Bank itself to file a petition for the winding up of a Non-Banking Financial Company, if the conditions stipulated in clauses (a) to (d) of sub-section (1) thereof are satisfied. One of the conditions stipulated is that the Non-Banking Financial Company had become "unable to pay its debts". But the inability of a NBFC to pay its debt, as contemplated in Section 45-MC(1)(a) stands on a different footing from the presumption of inability to pay the debt raised in Section 433(e) of the Companies Act, 1956. This is seen from sub-section (2) of Section 45-MC, which states that a NBFC shall be deemed to be unable to pay its debt if it has refused or has failed to meet, within 5 working days, any lawful demand made at any of the Offices of the NBFC and the Reserve Bank certifies in writing that the NBFC is unable to pay its debt. Therefore, Section 45-MC(2) overrides Section 434(1)(a) of the Companies Act, 1956. 39. But once the Reserve Bank files a petition for winding up under Section Section 45-MC(1), then the provisions of the Companies Act, will automatically apply by virtue of sub-section (4). Therefore, it appears that the moment Reserve Bank files a petition for winding up, the provisions of the Companies Act, 1956 alone will prevail thereafter. 40. Section 45-Q makes the provisions of Chapter III-B to have overriding effect upon any other law for the time being in force or any other instrument having effect by virtue of any law. Since Section 45-Q was also inserted only under Act 23 of 1997 with effect from 9.1.1997, there is no difficulty in concluding that the provisions of Chapter III-B will apply notwithstanding anything to the contrary contained in the Companies Act, 1956. 41. Interestingly, a special power is conferred under Section 45-QA upon the Company Law Board to direct the Non-Banking Financial Company, either on its own motion or on an application of the depositor, to make repayment of the deposit. Therefore, a depositor in a Non-Banking Financial Company need not even approach the Civil Court upon the maturity of his deposit. He can file an application before the Company Law Board under Section 45-QA(2). 42.
Therefore, a depositor in a Non-Banking Financial Company need not even approach the Civil Court upon the maturity of his deposit. He can file an application before the Company Law Board under Section 45-QA(2). 42. Despite all the rigours of Chapter III-B, it appears that the provisions thereof are not indispensable. Section 45-NC empowers the Reserve Bank, upon being satisfied that it is necessary to do so, to declare by notification in the Official Gazette, any or all of the provisions of Chapter III-B, to be not applicable to a Non-Banking Financial Institution or a class of Non-Banking Financial Institutions, either generally or for such period as may be prescribed. 43. Therefore, two things are very clear viz., (i) that under sub-section (5) of Section 45-IB, the Reserve Bank has power to condone the failure of a Non-Banking Financial Institution to comply with the requirement of investments in unencumbered approved securities at a particular percentage of the total amount of deposits; and (ii) that under Section 45-NC, the Reserve Bank has a general power to exempt any Non-Banking Financial Company from the application of the provisions of Chapter III-B. 44. Keeping in mind, the Scheme of Chapter III-B, let me get back to the first question viz., as to whether the SLR to be maintained by a Non-Banking Financial Company at a particular percentage of the total deposits received by them, is to be calculated on the face value of the deposits or on the aggregate of the principal amount and interest taken together. 45. As seen from Section 45-IB(1), which I have extracted above, the Section uses two phrases viz., (i) shall invest and (ii) continue to invest. The amount to be invested, is to be calculated at a fixed percentage as prescribed by the Reserve Bank, on the value of "the deposits outstanding as at the close of business on the last working day of the second preceding quarter". 46. The word "deposit" is defined in Section 45-I(bb) to include any receipt of money by way of deposit or loan or in any other form. Interestingly, it is an inclusive definition which also lists out a lot of exclusions. Therefore, it is clear that the Statute has left the definition of the word "deposit", to the imagination of Courts, after merely indicating what is included and what is excluded.
Interestingly, it is an inclusive definition which also lists out a lot of exclusions. Therefore, it is clear that the Statute has left the definition of the word "deposit", to the imagination of Courts, after merely indicating what is included and what is excluded. Consequently, one has to understand the meaning of the expression in common and commercial parlance. 47. The Reserve Bank of India itself has understood the definition of the word "deposit" to include the interest accrued thereon. If a Statute confers certain special powers upon a Regulatory Authority to issue directions that have a binding force and also confers powers of exemption upon the same authority, then the way in which such an authority had understood a word contained in the Statute, has to be given weightage. It appears that the Reserve Bank had understood the expression "deposit" to include the interest accrued thereon. This is borne out by the columns contained in a printed Form of Return to be submitted by every Non-Banking Financial Company at the end of every quarter. Though Mr.Arvind P.Datar, learned Senior Counsel for the petitioner contended that the contents of a Form cannot override the provisions of a Statute, I do not think that the issue should be looked at like that. The contents of the Form discloses the manner in which a particular word in the Statute is understood and acted upon by the Regulatory Body. Such an understanding cannot also be said to be completely fanciful, in view of the fact that the definition contained in Section 45-I(bb) is only an inclusive definition and not an exhaustive one. Moreover, the expressions "shall invest" and "continue to invest" appearing in Section 45-IB(1) makes it clear that the amount to be maintained in SLR will keep floating depending upon the total amount of liability of the Non-Banking Financial Company. Hence, I am of the view that the total amount of investment to be made in terms of Section 45-IB(1) by a Non-Banking Financial Company has to be calculated by taking together, the principal amount as well as the interest accrued on the deposits. 48. It must be remembered that the object and purpose of Chapter III-B is to protect innocent depositors. Therefore, the Court is duty bound to adopt that interpretation which will advance the cause for which Chapter III-B was inserted.
48. It must be remembered that the object and purpose of Chapter III-B is to protect innocent depositors. Therefore, the Court is duty bound to adopt that interpretation which will advance the cause for which Chapter III-B was inserted. However hard the case of the writ petitioner may be, it should not lead me to a slippery slope, where other Non-Banking Financial Companies will have an easy escape route. Therefore, I hold on the first question that the amount of investments (SLR) to be maintained by a Non-Banking Financial Company is to be calculated on the aggregate of the principal amount of deposits together with the interests accrued thereon. 49. That takes me to the next question as to whether the SLR amount would include the interest accumulated thereon or not. This question has arisen, in view of the fact that the writ petitioner does not want to liquidate the SLR investment. The writ petitioner is praying only for taking away the interest accumulated on the SLR investment, claiming that the interest accumulated on the investment, does not form part of the SLR investment. 50. To find an answer to the above question, we may have to go back again to the provisions of Chapter III-B of the Act. As I have pointed out earlier, the requirement to maintain a deposit in unencumbered approved securities, arises out of the provisions of Section 45-IB(1) of the Act. Section 45-IB does not talk about the deposit. It speaks only about an investment to be made by a Non-Banking Financial Company in unencumbered approved securities. The expression approved securities is defined in Explanation (i) under Section 45-IB to mean "securities of any State Government or Central Government and such bonds, both the principal whereof and the interest whereon shall have been fully and unconditionally guaranteed by any such Government". 51. Similarly, the expression "unencumbered approved securities" is defined in Explanation (ii) under Section 45-IB to include "the approved securities lodged by the Non-Banking Financial Company with another institution for an advance or any other arrangement to the extent to which such securities have not been drawn against or availed of or encumbered in any manner". 52.
51. Similarly, the expression "unencumbered approved securities" is defined in Explanation (ii) under Section 45-IB to include "the approved securities lodged by the Non-Banking Financial Company with another institution for an advance or any other arrangement to the extent to which such securities have not been drawn against or availed of or encumbered in any manner". 52. In exercise of the powers conferred by Sections 45-J, 45-K, 45-L and 45-MA of the Reserve Bank of India Act, 1934, the Reserve Bank had issued a set of directions known as "Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions 1998", which came into force with effect from 31.1.1998. These Directions were amended from time to time. In Paragraph-6 of those Directions, the Reserve Bank of India indicated the requirements for a Non-Banking Financial Company to have safe-custody of approved securities. As per the said Direction No.6, every Non-Banking Financial Company is obliged to open a Constituent's Subsidiary General Ledger (CSGL) Account with a Scheduled Commercial Bank and keep the unencumbered approved securities required to be maintained in pursuance of Section 45-IB in such CSGL Account. Thereafter, the Non-Banking Financial Company should designate one of the Scheduled Commercial Banks, as its designated banker and entrust to such bank, the unencumbered term deposits in physical form. After doing so, the Non-Banking Financial Company should intimate the name and address of such Scheduled Commercial Bank to the Regional Office of the Reserve Bank of India. 53. Under Paragraph No.6(2) of the aforesaid Directions, the securities mentioned in sub-paragraph (1) of paragraph 6 should be continued to be kept as specified therein for the benefit of the depositors and it should not be withdrawn or encashed or otherwise dealt with by the Non-Banking Financial Company except for repayment to the depositors with the prior approval of the Reserve Bank of India.
The provisions of sub-paragraphs (2) and (3) of paragraph 6 of the aforesaid Directions require to be re-produced and hence they are re-produced as follows:- "[(2) The securities mentioned in sub-paragraph (1) above shall continue to be kept as specified therein for the benefit of the depositors and shall not be withdrawn or encashed or otherwise dealt with by the non-banking financial company except for repayment to the depositors with the prior approval of Reserve Bank of India: Provided that, (i) a non-banking financial company may withdraw a portion of such securities in proportion to the reduction of its public deposits duly certified to that effect by its auditor; (ii) where the non-banking financial company intends to substitute such securities kept in physical form, it may do so by entrusting securities of equal value to the designated bank or SHCIL before such withdrawal; and (iii) the market value of these securities shall, at no point of time, be less than the percentage of public deposits as specified in Notification No.DFC.121/ED(G)-98 dated January 31, 1998; (3) Where the non-banking financial company intends to trade, either by entering into ready forward contracts, including reverse ready forward contracts, or otherwise, in the government securities that are held in excess of the requirement under Section 45-IB of the Act and Notification No.DFC.121/ED(G)-98 dated January 31, 1998, the same may be undertaken by opening a separate CSGL or dematerialised account for keeping such excess government securities.]" 54. A careful reading of paragraph 6 of the 1998 Directions, would show that the obligation of the Non-Banking Financial Company is to keep an amount as prescribed by the Reserve Bank of India from time to time, in a CSGL Account with a Scheduled Commercial Bank and the same shall not be touched without the prior approval of the Reserve Bank of India. Under the proviso to sub-paragraph (2), the Non-Banking Financial Company has a right to withdraw a portion of such securities in proportion to the reduction of its public deposits. Similarly, the Non-Banking Financial Company is also entitled to substitute the securities kept in physical form, by entrusting securities of equal value. 55. Proviso (iii) under sub-paragraph (2) of paragraph 6 of the Directions shows that the market value of the securities shall at no point of time be less than the percentage of public deposits as specified in the 1998 Notification.
55. Proviso (iii) under sub-paragraph (2) of paragraph 6 of the Directions shows that the market value of the securities shall at no point of time be less than the percentage of public deposits as specified in the 1998 Notification. Therefore, it appears that the phrase "market value of the securities" appearing in Proviso (iii) under sub-paragraph (2) of Paragraph-6 holds the key to the issue on hand. If a security is in the nature of any asset other than a deposit, the market value of such asset determines whether there is compliance with the requirement to maintain 15% of the total deposits in unencumbered approved securities or not. As a corollary, if the security is actually in the form of deposit, the market value of such deposit would naturally include the principal as well as the interest. 56. In other words, the market value of a fixed deposit or a term deposit or any other deposit would naturally include the interest accrued thereon. A deposit given as security, will have a market value that is not confined only to the principal amount of deposit. Therefore, I think the respondent is right in contending that the SLR maintained by the writ petitioner would include both the principal as well as the interest accrued thereon. 57. The law is clear to the effect that the Directions issued by the Reserve Bank of India in exercise of the power conferred by Sections 45-J, 45-K, etc., have a binding force. In Peerless General Finance and Investment Co. Ltd vs. Reserve Bank of India { AIR 1992 SC 1033 }, the Supreme Court pointed out that a very wide power is given to the Reserve Bank of India to issue Directions in respect of any matters relating to or connected with the receipt of deposits. These Directions have binding effect upon all Banking Companies. In paragraph 31 of the same decision, the Supreme Court pointed out the importance of the role assigned to the Reserve Bank of India, for the purpose of safeguarding the economy and financial stability of the country. In paragraph 53, the Court emphasised the place of pre-eminence occupied by the Reserve Bank of India to ensure monetary discipline and held that the Directions issued under Chapter III-B of the Act, are in the nature of Statutory Regulations.
In paragraph 53, the Court emphasised the place of pre-eminence occupied by the Reserve Bank of India to ensure monetary discipline and held that the Directions issued under Chapter III-B of the Act, are in the nature of Statutory Regulations. The Directions issued by the Reserve Bank of India were held to be part of the Statute itself. 58. Again in Reserve Bank of India vs. Peerless General Finance and Investment Co. Ltd {1996 (Vol.85) CC 920}, the Supreme Court emphasised that an enabling provision empowering the Reserve Bank of India to regulate the functioning of Non-Banking Financial Companies, must be so construed as to subserve the purpose for which it has been enacted. Therefore, the Directions of the year 1998, issued by the Reserve Bank of India have statutory force and these Directions make it clear that the "investment to be made at a particular percentage, is determined by the market value of the securities". A deposit in SLR account, would naturally include the interest accumulated thereon, so as to come within the purview of the expression "market value of the security". As pointed out earlier, the market value of a deposit would naturally include the principal amount of deposit as well as the interest accrued thereon. Therefore, my answer to the second question would be that the amount lying in SLR would include the interest accrued thereon. 59. In view of my answer to both questions, that have arisen for consideration, it follows as a corollary that a Non-Banking Financial Company cannot ask for liquidation of either the principal amount lying in SLR or the interest accumulated thereon, for the purpose of paying off anyone other than the depositors. Hence, the stand taken by the respondent cannot be found fault with, at least on principle. 60. But that does not resolve the problem. Every problem will have to have a solution, though some solutions may lead to new problems. After all, it should be borne in mind that every Statutory Regulation is intended to safeguard the interest of the weak against the strong and not really to make the strong weaker. Keeping this in mind, let me get back to the facts. 61.
Every problem will have to have a solution, though some solutions may lead to new problems. After all, it should be borne in mind that every Statutory Regulation is intended to safeguard the interest of the weak against the strong and not really to make the strong weaker. Keeping this in mind, let me get back to the facts. 61. There is no dispute about the fact that the writ petitioner filed a petition under Section 391 of the Companies Act, 1956 on the file of this Court for the approval of a Scheme of Compromise. Though the said petition in C.P.No.160 of 2005 was allowed by a learned Judge, the Division Bench reversed the said decision. The order of the Division Bench was confirmed by the Supreme Court in SLP (Civil) Nos.12737 to 12740 of 2008. 62. Thereafter, a petition in C.P.No.172 of 2012 was filed by one of the creditors namely the Federal Bank Limited under Section 433 of the Companies Act, 1956 for the winding up of the petitioner herein. In the said petition, this Court (Company Court) appointed a retired I.A.S. Officer, who is also practising as an Advocate, as an Administrator, with the consent of the writ petitioner, to realise the amounts due to the petitioner-company from its own debtors and to pay off the depositors and other creditors. The Administrator is actually acting almost like a Provisional Liquidator, to take care of the interest of the entire body of creditors. 63. The Administrator has filed a report into Court, giving details of the amounts realisable from the debtors of the company. As per the Report of the Administrator appointed by this Court, the Company has a total claim of Rs.487,61,22,063/- as on 31.8.2013. The petitioner-company has filed about 629 civil suits for recovery of a total amount of Rs.184,96,53,980.97 from its borrowers, in various Courts in Tamil Nadu, Karnataka and Kerala. The amounts realisable by the petitioner-company, represent monies lent by the petitioner on hire purchasing, lease financing and factoring. Out of those 629 suits, 559 suits for recovery of Rs.63,43,81,949.41 have already been decreed. As on date, 60 suits for recovery of Rs.115,96,94,024.03 are pending. Out of these 60 suits which are now pending, only 3 suits are pending in the City Civil Court and the remaining 57 suits are pending on the file of the Original Side of this High Court itself.
As on date, 60 suits for recovery of Rs.115,96,94,024.03 are pending. Out of these 60 suits which are now pending, only 3 suits are pending in the City Civil Court and the remaining 57 suits are pending on the file of the Original Side of this High Court itself. Therefore, it is possible to deal with all those suits through the Company Court itself, by passing necessary orders and by invoking Section 446 of the Companies Act, 1956. 64. From the above, it appears that once the dues of the writ petitioner to the ten secured creditor-banks are discharged under a One Time Settlement, all the other assets including the realisables, will become available for the benefit of the entire body of creditors including the depositors. Such a course of action will only enure to the benefit of the depositors, whose interest alone the respondent is seeking to protect under the impugned orders. 65. As rightly contended by Mr.Arvind P.Datar, learned Senior Counsel for the writ petitioner, the choice today is only between the devil and the deep sea. If the SLR is not touched, the interests of the depositors will stand protected. But this protection will only be for a limited period and to a limited extent and it may eventually turn out to be only illusory. If no settlement is reached in terms of the OTS proposals with those 10 secured creditor-banks, they will naturally proceed with measures for recovery. Under the weight of the huge debts, the petitioner-company may crumble and eventually get wound up. In such an event, the SLR amounts may have to come to the coffers of the Official Liquidator. Theoretically it may be true that by virtue of the provisions of the Reserve Bank of India Act, 1934, the SLR amount could be directed to be disbursed by the Official Liquidator only to the depositors. But I do not think that the secured creditor-banks will allow that to happen so easily without a tough fight on the question as to whether the depositors are secured creditors or not. Once an order of winding up is passed, the Reserve Bank will have to hand over the SLR amount to the Official Liquidator and walk out of the scene as Lord Mountbatten.
Once an order of winding up is passed, the Reserve Bank will have to hand over the SLR amount to the Official Liquidator and walk out of the scene as Lord Mountbatten. Ultimately, there will only be a scramble as it happened during the partition days between Nationalised and Scheduled Banks on the one hand and the depositors on the other hand. By this process, the Reserve Bank will only be aggravating the sufferings of the depositors, of course with all noble intentions, even while aggravating the sufferings of the petitioner-company. Therefore, as a Company Court dealing with all the issues in a composite manner, I am duty bound to find a way out, certainly not for the benefit of the petitioner-company, but for the benefit of the depositors as well as the secured creditor-banks. 66. Having considered the entire Scheme of Chapter III-B of the Reserve Bank of India Act, 1934 and the 1998 Directions issued by the Reserve Bank of India in exercise of powers conferred by Sections 45-J and 45-K, I am of the view that the problem on hand is not without a solution. I have already indicated that the requirement to maintain an investment in unencumbered approved securities, is imposed under Section 45-IB(1). But sub-section (5) confers powers upon the Reserve Bank of India to condone the failure of a Non-Banking Financial Company to comply with the provisions of sub-section (1). 67. De hors Section 45-IB(5), the Reserve Bank has the general power of exemption under Section 45-NC, to declare by notification in the Official Gazette that any or all of the provisions of Chapter III-B shall not apply to a Non-Banking Financial Institution. Even the proviso (i) under paragraph 6 (2) of the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions 1998, enables a Non-Banking Financial Company to withdraw a portion of the securities in proportion to the reduction of its public deposits. Proviso (ii) under paragraph 6 (2) of the very same Directions, 1998, enables a Non-Banking Financial Company to substitute such securities by entrusting securities of equal value. 68. Therefore, the respondent has enormous powers, to grant general or special exemption or even to permit the petitioner to substitute securities. It is no doubt a discretionary power vested in them, to be exercised in appropriate cases.
68. Therefore, the respondent has enormous powers, to grant general or special exemption or even to permit the petitioner to substitute securities. It is no doubt a discretionary power vested in them, to be exercised in appropriate cases. But I am of the view that in cases of this nature, where the Company Court is monitoring both the recovery of dues to the writ petitioner-company and the payment of dues to the creditors of the petitioner-company, the respondent is obliged to exercise the discretionary power, so that the sufferings of the depositors are also alleviated. 69. In Maharashtra Apex Corporation Ltd., In Re, {2005 (Vol.124) Comp. Cases 637 (Kar.)}, the Company Court of Karnataka was concered with a petition under Sections 391 to 393 of the Companies Act, 1956 for the sanction of a Scheme of Compromise and Arrangement. The Reserve Bank of India entered appearance in the petition and opposed the Scheme primarily on the ground that the Scheme contemplated the liquidation of statutory liquidity ratio securities and that it was violative of Section 45-IB of the Reserve Bank of India Act, 1934. 70. The Karnataka High Court (Company Court), during the hearing of the petition, called upon the Reserve Bank of India to suggest safeguards by way of amendments to the proposed Scheme. The amendments suggested by the Reserve Bank of India were not acceptable to the company. Therefore, the objections of the Reserve Bank of India were considered by the Karnataka High Court. After adverting to the Scheme Chapter III-B of the Reserve Bank of India Act, 1934, the Karnataka High Court ultimately held in that case that the grant of permission to liquidate the SLR investment only for the purpose of payment to secured and unsecured creditors, cannot be said to be contrary to public interest or the law. Therefore, the Court allowed the company petition and approved the Scheme. Hence it is clear that in the larger interest of all the creditors, one High Court has taken a similar view, though not in such great detail as I have indicated above. 71. The respondent cannot today suspect that the SLR amount may get siphoned off. The petitioner-company is now not in the hands of its promoters but in the hands of an Administrator appointed by this Court in a company petition for winding up. The Court is actually monitoring the recovery and payment.
71. The respondent cannot today suspect that the SLR amount may get siphoned off. The petitioner-company is now not in the hands of its promoters but in the hands of an Administrator appointed by this Court in a company petition for winding up. The Court is actually monitoring the recovery and payment. Therefore, I am of the view that directing the Reserve Bank to release the interest accumulated on the SLR, for the purpose of payment to the 10 secured creditor-banks under the One Time Settlement Proposals, will serve the ends of justice. 72. In view of the above, the writ petition is allowed to the following effect:- (i) The petitioner is permitted to get Letters of Acceptance of OTS proposals from all the creditor-banks (both Scheduled and Nationalised) or their Assignees. (ii) Every Letter of Acceptance of OTS proposal shall be forwarded by the petitioner-company through the Administrator appointed by this Court, to the respondent then and there. (iii) Upon receipt of the Letters of Acceptance of OTS proposals through the Administrator, the respondent shall issue necessary permission to the Administrator to withdraw from the interest accumulated on the SLR amounts, necessary funds for payment to the banks. But the total amount for which permission shall be granted by the respondent, shall not exceed the total amount of interest accumulated to the SLR amounts. (iv) There will be no order as to costs.